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The long-delayed accounts of one of Red Funnel’s group of companies have raised serious issues.
Southampton, Isle of Wight and South of England Royal Mail Steam Packet Company (SIOW), the trading arm of Red Funnel, filed its accounts last week, six months later than expected, and they contain information that has left the Island’s MPs and others concerned. No other companies within the group have filed their accounts, meaning it is still impossible to see the full financial picture.
Financial distress behind the scenes?
SIOW dates back to 1861, and is one of the oldest on Companies House register. So the six-month delay was particularly surprising.
It was achieved by using an accounting technique known as the ‘one day diddle’. Reducing the company’s year-end by a single day gives an extra three months before the accounts must be filed. Red Funnel used it twice in three months, which a financial expert told the IW Observer is “almost unheard of”. It is a tactic commonly associated with businesses in financial distress, and is so discredited that legislation has already been passed which will soon make it illegal.
While CEO, Fran Collins, claimed on March 28 that Red Funnel is in a “resilient” and “very strong position”, analysis of the accounts she signed only the day before paints a very different picture. Although the accounts were prepared on a ‘going concern’ basis – meaning its directors believe it can operate for the next 12 months – they, and auditor, James Newman, of BDO Southampton, also issued a major warning by including a “Material Uncertainty related to Going Concern” (MUGC) clause.
This is a crucial red flag in accounting terms, signalling significant concerns over the company’s ability to stay solvent in the months ahead. The auditor revealed that, by September 30, less than six months from now, Red Funnel could face serious financial issues.
He warns there could be a demand for the £40.1 million to be repaid immediately, which the Group would be unable to do. He says this may cast “significant doubt on the Group and Company’s ability to continue as a going concern”.
Sir Paul Kenny, recently appointed by the Island’s two MPs to lead a board to hold the ferry companies to account said: “There are a large number of serious questions surrounding the management and financial structure of Red Funnel. What’s needed now is transparency and serious answers.”
What the MUGC warning means and why it matters
The Red Funnel Group has huge debts, including a £40.1 million loan taken out in 2017, due for repayment in 2022. This was extended until 2024 but remains unpaid. It has now been extended by 18 months, until September 2026, when another loan of £29.8 million will also fall due. However, a condition attached to the extension means new funding must be found before October, underlining the urgency of the company’s financial predicament. If Red Funnel cannot find refinancing, investment, or a buyer within months, its auditor warns the company’s future could be precarious.
The warning follows more than a year of unsuccessful attempts to sell the company. Prospective buyers, such as Irish Ferries and Arcus Investment Partners, reportedly withdrew after months of discussions.
Arcus revealed in August last year the need for “immediate investment”. Another potential buyer, Real Asset Investment Management (RAIM), appears to have made little progress. In any event there are concerns over its suitability as they have no marine or public transport investments or any obvious experience of turning around a failing company – but Red Funnel are clearly in desperate straits.
The full financial picture looks bleak. When Red Funnel Ltd last filed its accounts (to year-end 2022) the company had external loans of over £110 million and more than £184 million internal debt. Those accounts valued Red Funnel at over £341 million; however discussions with RAIM have reportedly centred around a purchase price of just £40 million – even this has yet to be achieved.
Concerns with fleet and profits Red Funnel’s operational challenges add further strain. Its elderly vessels are increasingly plagued by reliability issues.
On Saturday, at the beginning of the Easter holiday season, Red Eagle had to return to Southampton during her first crossing after a lengthy annual refit. Passengers reported hearing a “clanking noise” from the engine. The vessel remained out of service until Tuesday. Yesterday (Thursday) yet more crossings were cancelled.
There are further issues with the company’s fleet. Recently, a Red Jet had to be ‘pushed’ onto its berth in Cowes. One passenger told the IW Observer: “I could not believe there was no announcement or information given. We were all expected to accept it is perfectly normal for a catamaran to be unable to berth safely under its own power.”
The company’s challenges extend beyond ageing ships to decreasing profitability.
Despite turnover rising from £55.3 to £61 million, profits fell by 21 per cent to around £12 million in the year to December 2023.
While that is still a healthy return, the noticeable drop indicates further financial pressures on a company that faces huge debts and an urgent need for £100 million to update its fleet.
In May last year Miss Collins announced that tenders for three new car ferries would be issued “later this year”. There have been no tenders, no orders and even the first stage of ship construction, booking build slots, has not happened.
Why Islanders should take note
The financial state of Red Funnel isn’t just a concern for the corporate world, it has real implications for Island residents, commuters, and local businesses.
Many Islanders pay large sums in advance for ferry travel. Some spend over £1,000 on travel cards for discounted car ferry crossings, and others shell out more than £3,500 for annual season tickets.
This money would be at risk if Red Funnel went into administration, and of course there would be chaos for Islanders and tourists. Island businesses, which supply goods and services to Red Funnel, also rely on the company’s financial stability and good standing.
Islanders forced to do business with Red Funnel because they need to cross the Solent to Southampton have a right to transparency regarding the financial stability of the company. The CEO withholding vital information – such as failing to disclose the MUGC warning during public statements – is misleading and unacceptable. As well as being one of the 31 Elder Brethren of Trinity House, a position of influence and trust in the shipping world, Miss Collins holds a Chartered Director qualification, supposed to guarantee high standards and ethics.
The Island’s MPs are of opposing parties, but are united in their condemnation of the current situation. Richard Quigley (Labour, IW West) said: “This is more worrying news for Islanders relying on Red Funnel to travel for work, hospital appointments and other time sensitive events. It highlights the problems with the private equity model for financing essential services. I continue to press this point to government and will continue to work with Joe to find a solution.”
Joe Robertson (Conservative, IW East) pointed out that the ferry services are completely unregulated. He added: “Islanders deserve honesty, clarity and accountability from Red Funnel’s leadership. Public transport providers across the UK have to be transparent with their finances. Cross-Solent operators should be no different.”
Miss Collins is apparently out of the office with limited access to her emails, so we asked the company’s chairman, Stephen Ridgway, for a comment, but received no response. He receives thousands of pounds for speaking at corporate events – it seems the situation at Red Funnel leaves him speechless. He’s not alone!
Who audits the auditors?
Concerns about the audit process have surfaced following issues contained in SIOW’s accounts.
Red Funnel’s directors’ report lists various risks, with the first saying the group’s earnings rely on a reliable fleet and shore-side infrastructure. They claim to minimise these risks with “duplicated systems, equipment and processes wherever possible.” However, the reliability of the car ferries – well-known for frequent breakdowns and cancellations – raises serious questions.
Auditor James Newman, of BDO in Southampton, states his role is to gain “reasonable reassurance” about the accuracy of information in the accounts that might affect the company’s finances.
We asked if Mr Newman found the directors’ claims consistent with the frequent service disruptions.
SIOW’s audit fees ballooned from £86,000 in 2022 to £227,000 in 2023.
We queried the reason for this massive rise and how Mr Newman safeguards his independence amid such payments.
We also asked whether he supported the company twice using the “one-day diddle” to delay filing their accounts.
Mr Newman did not respond, but a company spokeswoman contacted us citing “client confidentiality” as the reason BDO could not respond to these and other questions. To be clear, we are not suggesting that Mr Newman has acted improperly. However, we believe these matters require further scrutiny.
The IW Observer is now in dialogue with the Institute of Chartered Accountants to explain and explore these concerns. We have also contacted the Financial Conduct Authority. This week the Financial Reporting Council has opened an investigation into another audit conducted by BDO.
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